Why the Bullish Dollar Thesis is Flawed

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Market Drivers October 7, 2019
Risk-off flows open the week
Euro area sentiment sinks
Nikkei -0.16% Dax -0.10%
UST 10Y 1.52%
Oil $53/bbl
Gold $1501/oz
BTCUSD $7921

Europe and Asia:
EU Sentix -16.8 vs. -13.0

North America:
No Data

It’s been quiet but a shaky start of the week in FX with risk-off flows dominating the open of EU trade as economic data and geo-political risk continue to weigh on the market.

In Hong Kong, there was no end to the protests which continue to escalate in violence and confrontation. So far China has shown restraint at using military action to quash the demonstrators, but its clear Beijing is itching to quell the unrest.

Additionally, the messaging on the trade negotiation front has turned decidedly negative as the Chinese delegation denied that any progress has been made. The CCP may be making a calculated decision that Trump is a wounded animal at this point and that his chances of reelection are declining,

Although that may be true, the CCP would be miscalculating badly in its assessment that it will be easier to negotiate with the Democrats. Trump has managed to make his anti-China stance a bipartisan issue and the Democrats would be much tougher on any human rights violations in HK than the Trump administration. Much like Hitler made a fateful error to attack Stalin rather than maintain an alliance with him, the CCP may be making a massive tactical mistake not to do a deal with Trump.

A Democratic President focused on corporate reform and human rights abuses would be a much worse opponent for Chinese than Trump.

In the near term, the markets are clearly losing hope that any progress on the trade front will be accomplished and are basically hoping for a “cold peace” that does not further aggravate the global trade structure and create additional slowdown in growth. That seems to wishful thinking at this point as US data, despite the record low unemployment data, is signaling stagnant demand.

Unemployment is a lagging not a leading indicator and peak employment reading often coincide with the start of the recession. More importantly, both job growth and wage growth have slowed markedly suggesting that there will be no massive bump from consumer spending in the Christmas season. The Fed, therefore, will continue to ease into the year-end and more importantly flood the system with dollars as it tries to prevent a lock-up in the repo market. All of this suggests that the bull dollar thesis may be flawed. Despite the horrid data across the pond, the US decoupling thesis is evaporating and that is likely to signal a lower rather higher dollar in months ahead.

Boris Schlossberg
Managing Director

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